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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549



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FORM 10-Q



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



FOR THE PERIOD ENDED June 30, 2004



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



FOR THE TRANSITION PERIOD FROM  TO
 .



COMMISSION FILE NUMBER: 0-31265



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TELIK, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|DELAWARE                                                       |  | 93-0987903                          
|(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) |  | (I.R.S. EMPLOYER IDENTIFICATION NO.)



3165 PORTER DRIVE,
PALO ALTO, CA 94304

(ADDRESS, INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVE OFFICES)



REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 845-7700



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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE



SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:



COMMON STOCK $0.01 PAR VALUE

(TITLE OF CLASS)



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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.    Yes  x    No ̈



Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No ̈



Indicate the number of shares outstanding of
each of the issuers classes of common stock, as of the latest practicable date.



|                                    |  |                                                
|----------------------------------- |  | -----------------------------------------------
|Class: Common Stock $0.01 par value |  | Outstanding at July 31, 2004: 43,692,422 shares



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##### Table of Contents

TELIK, INC.



INDEX



|           |  |                                                                                                     |  |     
|---------- |  | --------------------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                                     |  | Page
|PART I.    |  | FINANCIAL INFORMATION                                                                               |  |     
|           |  |                                                                                                    
|Item 1:    |  | Financial Statements (Unaudited)                                                                    |  |     
|           |  |                                                                                                    
|           |  | Condensed Balance Sheets as of June 30, 2004 and December 31, 2003                                  |  | 3   
|           |  |                                                                                                    
|           |  | Condensed Statements of Operations for the three months and six months ended June 30, 2004 and 2003 |  | 4   
|           |  |                                                                                                    
|           |  | Condensed Statements of Cash Flows for the six months ended June 30, 2004 and 2003                  |  | 5   
|           |  |                                                                                                    
|           |  | Notes to Condensed Financial Statements                                                             |  | 6   
|           |  |                                                                                                    
|Item 2:    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations               |  | 10  
|           |  |                                                                                                    
|Item 3:    |  | Quantitative and Qualitative Disclosures About Market Risk                                          |  | 27  
|           |  |                                                                                                    
|Item 4:    |  | Controls and Procedures                                                                             |  | 28  
|           |  |                                                                                                    
|PART II.   |  | OTHER INFORMATION                                                                                   |  |     
|           |  |                                                                                                    
|Item 4:    |  | Submission of Matters To a Vote of Security Holders                                                 |  | 29  
|           |  |                                                                                                    
|Item 5:    |  | Other Information                                                                                   |  | 29  
|           |  |                                                                                                    
|Item 6:    |  | Exhibits and Reports on Form 8-K                                                                    |  | 29  
|           | 
|SIGNATURES |  | 31                                                                                                 



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##### Table of Contents

PART I. FINANCIAL INFORMATION



Item 1. Financial Statements (Unaudited)



TELIK, INC.

CONDENSED BALANCE SHEETS

(In thousands, except share and per share data)



|                                                                                                                                                             |  |               |          |   |                   |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | -------- | - | ----------------- | - | -------- | -
|                                                                                                                                                             |  | June 30, 2004 |          |   | December 31, 2003 |  
|                                                                                                                                                             |  | (Unaudited)   |          |   | (Note 1)          |  
|Assets                                                                                                                                                       |  |               |          |   |                   |   |          |  
|Current assets:                                                                                                                                              |  |               |          |   |                   |   |          |  
|Cash and cash equivalents                                                                                                                                    |  | $             | 46,166   |   |                   | $ | 76,851   |  
|Short-term investments                                                                                                                                       |  |               | 106,727  |   |                   |   | 105,802  |  
|Other receivables                                                                                                                                            |  |               | 682      |   |                   |   | 354      |  
|Prepaids and other current assets                                                                                                                            |  |               | 1,239    |   |                   |   | 1,417    |  
|                                                                                                                                                             |  |               |          |   |                   |   |          |  
|Total current assets                                                                                                                                         |  |               | 154,814  |   |                   |   | 184,424  |  
|                                                                                                                                                             |  |              
|Property and equipment, net                                                                                                                                  |  |               | 5,394    |   |                   |   | 5,388    |  
|Long-term investments                                                                                                                                        |  |               | 17,279   |   |                   |   | 16,639   |  
|Restricted investments                                                                                                                                       |  |               | 1,796    |   |                   |   | 1,796    |  
|Other assets                                                                                                                                                 |  |               | 60       |   |                   |   | 60       |  
|                                                                                                                                                             |  |               |          |   |                   |   |          |  
|Total assets                                                                                                                                                 |  | $             | 179,343  |   |                   | $ | 208,307  |  
|                                                                                                                                                             |  |               |          |   |                   |   |          |  
|Liabilities and Stockholders Equity                                                                                                                         |  |               |          |   |                   |   |          |  
|Current liabilities:                                                                                                                                         |  |               |          |   |                   |   |          |  
|Accounts payable                                                                                                                                             |  | $             | 3,686    |   |                   | $ | 2,623    |  
|Accrued clinical trials                                                                                                                                      |  |               | 6,769    |   |                   |   | 4,174    |  
|Accrued compensation                                                                                                                                         |  |               | 2,133    |   |                   |   | 3,232    |  
|Accrued liabilities                                                                                                                                          |  |               | 1,152    |   |                   |   | 836      |  
|Deferred revenue                                                                                                                                             |  |               | 106      |   |                   |   | 25       |  
|Current portion of capital leases and equipment loans                                                                                                        |  |               | 1,145    |   |                   |   | 907      |  
|                                                                                                                                                             |  |               |          |   |                   |   |          |  
|Total current liabilities                                                                                                                                    |  |               | 14,991   |   |                   |   | 11,797   |  
|                                                                                                                                                             |  |              
|Non-current portion of capital leases and equipment loans                                                                                                    |  |               | 1,380    |   |                   |   | 1,493    |  
|Other liabilities                                                                                                                                            |  |               | 909      |   |                   |   | 715      |  
|                                                                                                                                                             |  |              
|Commitments                                                                                                                                                  |  |               |          |   |                   |   |          |  
|Stockholders equity:                                                                                                                                        |  |               |          |   |                   |   |          |  
|Preferred stock, $0.01 par value: 5,000,000 shares authorized; none issued or outstanding                                                                    |  |               |         |   |                   |   |         |  
|Common stock, $0.01 par value, 100,000,000 shares authorized; shares issued and outstanding: 43,692,422 at June 30, 2004 and 43,583,457 at
December 31, 2003 |  |               | 437      |   |                   |   | 436      |  
|Additional paid-in capital                                                                                                                                   |  |               | 362,731  |   |                   |   | 361,840  |  
|Deferred stock compensation, net                                                                                                                             |  |               |         |   |                   |   | (93      | )
|Accumulated other comprehensive income                                                                                                                       |  |               | (181     | ) |                   |   | 50       |  
|Accumulated deficit                                                                                                                                          |  |               | (200,924 | ) |                   |   | (167,931 | )
|                                                                                                                                                             |  |               |          |   |                   |   |          |  
|Total stockholders equity                                                                                                                                   |  |               | 162,063  |   |                   |   | 194,302  |  
|                                                                                                                                                             |  |               |          |   |                   |   |          |  
|Total liabilities and stockholders equity                                                                                                                   |  | $             | 179,343  |   |                   | $ | 208,307  |  
|                                                                                                                                                             |  |               |          |   |                   |   |          |  



See accompanying Notes
to Condensed Financial Statements.



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TELIK, INC.

CONDENSED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)



|                                                                     |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------- |  | --------------------------- | ------- | - | ------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                     |  | Three Months Ended June 30, |         |   | Six Months Ended June 30, |  
|                                                                     |  | 2004                        |         |   | 2003                      |   |         | 2004 |  |   | 2003    |  
|Contract revenue from collaborations:                                |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|With related parties                                                 |  | $                           |        |   |                           | $ | 167     |      |  | $ |        |   |  | $ | 417     |  
|Other                                                                |  |                             | 44      |   |                           |   | 6       |      |  |   | 75      |   |  |   | 6       |  
|                                                                     |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Total revenues                                                       |  |                             | 44      |   |                           |   | 173     |      |  |   | 75      |   |  |   | 423     |  
|                                                                     |  |                             |         |  
|Operating costs and expenses:                                        |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Research and development                                             |  |                             | 15,576  |   |                           |   | 10,262  |      |  |   | 28,813  |   |  |   | 19,980  |  
|General and administrative                                           |  |                             | 2,734   |   |                           |   | 2,080   |      |  |   | 5,353   |   |  |   | 4,085   |  
|                                                                     |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Total operating costs and expenses                                   |  |                             | 18,310  |   |                           |   | 12,342  |      |  |   | 34,166  |   |  |   | 24,065  |  
|                                                                     |  |                             |         |  
|Loss from operations                                                 |  |                             | (18,266 | ) |                           |   | (12,169 | )    |  |   | (34,091 | ) |  |   | (23,642 | )
|                                                                     |  |                             |         |  
|Interest income                                                      |  |                             | 591     |   |                           |   | 311     |      |  |   | 1,200   |   |  |   | 685     |  
|Interest expense                                                     |  |                             | (51     | ) |                           |   | (40     | )    |  |   | (102    | ) |  |   | (52     | )
|                                                                     |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Net loss                                                             |  | $                           | (17,726 | ) |                           | $ | (11,898 | )    |  | $ | (32,993 | ) |  | $ | (23,009 | )
|                                                                     |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Basic and diluted net loss per common share                          |  | $                           | (0.41   | ) |                           | $ | (0.33   | )    |  | $ | (0.76   | ) |  | $ | (0.64   | )
|                                                                     |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Shares used to calculate basic and diluted net loss per common share |  |                             | 43,691  |   |                           |   | 35,840  |      |  |   | 43,656  |   |  |   | 35,749  |  
|                                                                     |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  



See accompanying Notes
to Condensed Financial Statements.



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TELIK, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                            |  |                           |         |   |      |   |         |  
|--------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | ------- | -
|                                                                            |  | Six Months Ended June 30, |        
|                                                                            |  | 2004                      |         |   | 2003 |  
|Cash flows from operating activities:                                       |  |                           |         |   |      |   |         |  
|Net loss                                                                    |  | $                         | (32,993 | ) |      | $ | (23,009 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                           |         |   |      |   |         |  
|Depreciation and amortization                                               |  |                           | 674     |   |      |   | 433     |  
|Amortization of deferred stock compensation                                 |  |                           | 93      |   |      |   | 228     |  
|Stock options granted to non-employees                                      |  |                           | 138     |   |      |   | 142     |  
|Changes in assets and liabilities:                                          |  |                           |         |   |      |   |         |  
|Other receivables                                                           |  |                           | (328    | ) |      |   | 1,662   |  
|Prepaid expenses and other current assets                                   |  |                           | 178     |   |      |   | 55      |  
|Other assets                                                                |  |                           |        |   |      |   | 45      |  
|Accounts payable                                                            |  |                           | 1,063   |   |      |   | (4,228  | )
|Accrued clinical trials, compensation and other liabilities                 |  |                           | 2,006   |   |      |   | 2,087   |  
|Deferred revenue                                                            |  |                           | 81      |   |      |   | (379    | )
|                                                                            |  |                           |         |   |      |   |         |  
|Net cash used in operating activities                                       |  |                           | (29,088 | ) |      |   | (22,964 | )
|                                                                            |  |                           |         |   |      |   |         |  
|Cash flows from investing activities:                                       |  |                           |         |   |      |   |         |  
|Purchases of investments                                                    |  |                           | (88,586 | ) |      |   | (63,330 | )
|Sales of investments                                                        |  |                           | 79,790  |   |      |   | 34,550  |  
|Maturities of investments                                                   |  |                           | 7,000   |   |      |   | 35,550  |  
|Change in restricted investments                                            |  |                           |        |   |      |   | 2,000   |  
|Purchases of property and equipment                                         |  |                           | (680    | ) |      |   | (3,458  | )
|                                                                            |  |                           |         |   |      |   |         |  
|Net cash provided by (used in) investing activities                         |  |                           | (2,476  | ) |      |   | 5,312   |  
|                                                                            |  |                           |         |   |      |   |         |  
|Cash flows from financing activities:                                       |  |                           |         |   |      |   |         |  
|Proceeds from equipment loans                                               |  |                           | 627     |   |      |   | 1,320   |  
|Principal payments under capital leases and equipment loans                 |  |                           | (502    | ) |      |   | (150    | )
|Proceeds from issuance of common stock                                      |  |                           | 754     |   |      |   | 1,715   |  
|                                                                            |  |                           |         |   |      |   |         |  
|Net cash provided by financing activities                                   |  |                           | 879     |   |      |   | 2,885   |  
|                                                                            |  |                           |         |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents                        |  |                           | (30,685 | ) |      |   | (14,767 | )
|Cash and cash equivalents at beginning of period                            |  |                           | 76,851  |   |      |   | 34,688  |  
|                                                                            |  |                           |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                  |  | $                         | 46,166  |   |      | $ | 19,921  |  
|                                                                            |  |                           |         |   |      |   |         |  
|Supplementary information:                                                  |  |                           |         |   |      |   |         |  
|Interest paid                                                               |  | $                         | 102     |   |      | $ | 52      |  
|Equipment acquired under capital leases                                     |  | $                         |        |   |      | $ | 839     |  



See accompanying Notes
to Condensed Financial Statements.



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TELIK, INC.

Notes to Condensed Financial Statements

(Unaudited)



1. Basis of presentation and summary of significant accounting policies



We have prepared the accompanying financial statements in accordance with accounting principles generally accepted in the United States, or GAAP, for
interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. We believe all
adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months and six months ended June 30, 2004 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2004 or any other period. The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date. You should read these financial statements and notes in
conjunction with our audited financial statements for the year ended December 31, 2003, which are included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 5, 2004.



Use of estimates



The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates.



Revenue recognition



Contract revenue consists of revenue from research and development collaboration agreements. Our research and development collaboration agreements provide
for periodic payments in support of our research activities. We recognize contract revenue from these agreements as earned based upon the performance requirements of the agreements and we recognize payments of up-front technology access and license
fees ratably over the period of the related research program. Payments received, which are related to future performance, are deferred and recognized as revenue when earned over future performance periods.



Stock-based compensation



We issue stock options to our employees and outside directors and provide
employees the right to purchase our stock pursuant to stockholder approved stock option and employee stock purchase programs. We account for our stock-based compensation plans under the intrinsic value method of accounting as defined by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. For pro forma disclosures, the estimated fair value of the options is amortized over the vesting period, typically four years, and
the estimated fair value of the stock purchases is amortized over the six-month purchase period. The following table illustrates the effect on net loss and net loss per common share if we had accounted for our stock option and stock purchase plans
under the fair value method of accounting under Statement of Financial Accounting Standards, or SFAS, No. 123, Accounting for Stock Based Compensation, as amended by SFAS No. 148 (in thousands):



|                                                                                                         |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                         |  | Three Months Ended June 30, |         |   | Six Months Ended June 30, |  
|                                                                                                         |  | 2004                        |         |   | 2003                      |   |         | 2004 |  |   | 2003    |  
|Net loss  as reported                                                                                   |  | $                           | (17,726 | ) |                           | $ | (11,898 | )    |  | $ | (32,993 | ) |  | $ | (23,009 | )
|Add: Stock-based employee compensation included in reported net loss                                     |  |                             |        |   |                           |   | 105     |      |  |   | 93      |   |  |   | 228     |  
|Deduct: Total stock-based employee compensation expense under the fair value based method for all awards |  |                             | (4,044  | ) |                           |   | (2,108  | )    |  |   | (7,741  | ) |  |   | (3,486  | )
|                                                                                                         |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Net loss  pro forma                                                                                     |  | $                           | (21,770 | ) |                           | $ | (13,901 | )    |  | $ | (40,641 | ) |  | $ | (26,267 | )
|                                                                                                         |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Basic and diluted net loss per common share  as reported                                                |  | $                           | (0.41   | ) |                           | $ | (0.33   | )    |  | $ | (0.76   | ) |  | $ | (0.64   | )
|                                                                                                         |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Basic and diluted net loss per common share  pro forma                                                  |  | $                           | (0.50   | ) |                           | $ | (0.39   | )    |  | $ | (0.93   | ) |  | $ | (0.73   | )
|                                                                                                         |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  



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We estimate the fair value of our options using the Black-Scholes option value model, which is one of
several methods that can be used to estimate option values. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation
models require the input of highly subjective assumptions, including the expected stock price volatility. Our options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can
materially affect the fair value estimates. The fair value of options granted and employee purchase plan shares were estimated at the date of grant using a Black-Scholes pricing model with the following weighted-average assumptions:



|                                |  |                             |   |  |                             |   |  |      |   |  |      |  
|------------------------------- |  | --------------------------- | - |  | --------------------------- | - |  | ---- | - |  | ---- | -
|                                |  | Stock Option Plans          |   |  | Stock Purchase Plan         |  
|                                |  | Three Months Ended June 30, |   |  | Three Months Ended June 30, |  
|                                |  | 2004                        |   |  | 2003                        |   |  | 2004 |   |  | 2003 |  
|Expected stock price volatility |  | 70.8                        | % |  | 77.4                        | % |  | 78.8 | % |  | 79.9 | %
|Risk-free interest rate         |  | 3.88                        | % |  | 2.63                        | % |  | 1.50 | % |  | 1.30 | %
|Expected life (in years)        |  | 5.03                        |   |  | 4.99                        |   |  | 1.62 |   |  | 1.24 |  
|Expected dividend yield         |  |                            |   |  |                            |   |  |     |   |  |     |  
|                                |  |                            
|                                |  | Stock Option Plans          |   |  | Stock Purchase Plan         |  
|                                |  | Six Months Ended June 30,   |   |  | Six Months Ended June 30,   |  
|                                |  | 2004                        |   |  | 2003                        |   |  | 2004 |   |  | 2003 |  
|Expected stock price volatility |  | 71.8                        | % |  | 78.5                        | % |  | 79.1 | % |  | 87.4 | %
|Risk-free interest rate         |  | 3.05                        | % |  | 2.87                        | % |  | 1.33 | % |  | 2.13 | %
|Expected life (in years)        |  | 5.07                        |   |  | 5.01                        |   |  | 1.35 |   |  | 1.38 |  
|Expected dividend yield         |  |                            |   |  |                            |   |  |     |   |  |     |  



Stock compensation
expense for options granted to non-employees has been determined in accordance with SFAS 123 and EITF 96-18, Accounting for Equity Investments that are issued to other than Employees for Acquiring, or in Conjunction with Selling Goods or
Services, as the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. The fair value of options granted to non-employees is periodically re-measured as the underlying
options vest.



2. Comprehensive loss



Comprehensive loss is comprised of net loss and other comprehensive income
(loss). Other comprehensive income (loss) includes changes in unrealized gains (losses) on investments. Comprehensive loss for the three and six months ended June 30, 2004 and 2003 are as follows (in thousands):



|                                                   |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|-------------------------------------------------- |  | --------------------------- | ------- | - | ------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                   |  | Three Months Ended June 30, |         |   | Six Months Ended June 30, |  
|                                                   |  | 2004                        |         |   | 2003                      |   |         | 2004 |  |   | 2003    |  
|Net loss                                           |  | $                           | (17,726 | ) |                           | $ | (11,898 | )    |  | $ | (32,993 | ) |  | $ | (23,009 | )
|Changes in unrealized gains(losses) on investments |  |                             | (265    | ) |                           |   |        |      |  |   | (231    | ) |  |   | 22      |  
|                                                   |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Comprehensive loss                                 |  | $                           | (17,991 | ) |                           | $ | (11,898 | )    |  | $ | (33,224 | ) |  | $ | (22,987 | )
|                                                   |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  



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3. Basic and diluted net loss per share



We have computed net loss per common share according to SFAS No. 128, Earnings Per Share, which requires disclosure of basic and
diluted earnings per share. Basic earnings per share exclude any dilutive effects of options, shares subject to repurchase, warrants and convertible securities. Diluted earnings per share include the impact of potentially dilutive securities.



Outstanding options to purchase an aggregate of 6,410,628 and
4,959,477 shares of our common stock for the six months ending June 30, 2004 and 2003 were excluded from diluted net loss per common share calculations because inclusion of such options would have an anti-dilutive effect on losses in these periods.



4. Cash, cash equivalents, investments and restricted investments



The following is a summary of cash equivalents,
investments and restricted investments (in thousands):



|                            |  |                   |         |                        |   |                         |  |   |                      |   |  |   |        
|--------------------------- |  | ----------------- | ------- | ---------------------- | - | ----------------------- |  | - | -------------------- | - |  | - | -------
|                            |  | June 30, 2004    
|                            |  | Amortized Costs   |         | Gross Unrealized Gains |   | Gross Unrealized Losses |  |   | Estimated Fair Value
|Certificate of deposit      |  | $                 | 1,796   |                        | $ |                        |  | $ |                     |   |  | $ | 1,796  
|Corporate notes             |  |                   | 65,443  |                        |   | 2                       |  |   | (33                  | ) |  |   | 65,412 
|Commercial paper            |  |                   | 58,418  |                        |   | 1                       |  |   | (8                   | ) |  |   | 58,411 
|Government agencies         |  |                   | 39,939  |                        |   | 15                      |  |   | (158                 | ) |  |   | 39,796 
|Cash and money market funds |  |                   | 6,553   |                        |   |                        |  |   |                     |   |  |   | 6,553  
|                            |  |                   |         |                        |   |                         |  |   |                      |   |  |   |        
|Total                       |  | $                 | 172,149 |                        | $ | 18                      |  | $ | (199                 | ) |  | $ | 171,968
|                            |  |                   |         |                        |   |                         |  |   |                      |   |  |   |        
|Reported as:                |  |                   |         |                        |   |                         |  |   |                      |   |  |   |        
|Cash and cash equivalents   |  |                   |         |                        |   |                         |  |   |                      |   |  | $ | 46,166 
|Short-term investments      |  |                   |         |                        |   |                         |  |   |                      |   |  |   | 106,727
|Long-term investments       |  |                   |         |                        |   |                         |  |   |                      |   |  |   | 17,279 
|Restricted investments      |  |                   |         |                        |   |                         |  |   |                      |   |  |   | 1,796  
|                            |  |                   |         |                        |   |                         |  |   |                      |   |  |   |        
|Total                       |  |                   |         |                        |   |                         |  |   |                      |   |  | $ | 171,968
|                            |  |                   |         |                        |   |                         |  |   |                      |   |  |   |        
|                            | 
|                            |  | December 31, 2003
|                            |  | Amortized Costs   |         | Gross Unrealized Gains |   | Gross Unrealized Losses |  |   | Estimated Fair Value
|Certificate of deposits     |  | $                 | 1,796   |                        | $ |                        |  | $ |                     |   |  | $ | 1,796  
|Corporate notes             |  |                   | 80,860  |                        |   | 26                      |  |   | (7                   | ) |  |   | 80,879 
|Commercial paper            |  |                   | 99,413  |                        |   | 9                       |  |   |                     |   |  |   | 99,422 
|Government notes            |  |                   | 10,606  |                        |   | 33                      |  |   | (11                  | ) |  |   | 10,628 
|Cash and money market funds |  |                   | 8,363   |                        |   |                        |  |   |                     |   |  |   | 8,363  
|                            |  |                   |         |                        |   |                         |  |   |                      |   |  |   |        
|Total                       |  | $                 | 201,038 |                        | $ | 68                      |  | $ | (18                  | ) |  | $ | 201,088
|                            |  |                   |         |                        |   |                         |  |   |                      |   |  |   |        
|Reported as:                |  |                   |         |                        |   |                         |  |   |                      |   |  |   |        
|Cash and cash equivalents   |  |                   |         |                        |   |                         |  |   |                      |   |  | $ | 76,851 
|Short-term investments      |  |                   |         |                        |   |                         |  |   |                      |   |  |   | 105,802
|Long-term investments       |  |                   |         |                        |   |                         |  |   |                      |   |  |   | 16,639 
|Restricted investments      |  |                   |         |                        |   |                         |  |   |                      |   |  |   | 1,796  
|                            |  |                   |         |                        |   |                         |  |   |                      |   |  |   |        
|Total                       |  |                   |         |                        |   |                         |  |   |                      |   |  | $ | 201,088
|                            |  |                   |         |                        |   |                         |  |   |                      |   |  |   |        



8



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##### Table of Contents

The net realized gains on sales of available for sale investments were not material for any periods
presented. Realized gains and losses were calculated based on the specific identification method. At June 30, 2004 and December 31, 2003, the weighted-average maturities of our available-for-sale securities were 77 days and 78 days, respectively.



5. Property and equipment



Property and equipment consist of the following (in thousands):



|                                               |  |               |        |   |                   |   |        |  
|---------------------------------------------- |  | ------------- | ------ | - | ----------------- | - | ------ | -
|                                               |  | June 30, 2004 |        |   | December 31, 2003 |  
|Computer and lab equipment                     |  | $             | 5,974  |   |                   | $ | 5,450  |  
|Office furniture and fixtures                  |  |               | 284    |   |                   |   | 178    |  
|Leasehold improvements                         |  |               | 3,196  |   |                   |   | 3,196  |  
|                                               |  |               |        |   |                   |   |        |  
|                                               |  |               | 9,454  |   |                   |   | 8,824  |  
|Less accumulated depreciation and amortization |  |               | (4,060 | ) |                   |   | (3,436 | )
|                                               |  |               |        |   |                   |   |        |  
|Property and equipment, net                    |  | $             | 5,394  |   |                   | $ | 5,388  |  
|                                               |  |               |        |   |                   |   |        |  



6. Capital leases and equipment
loans



At June 30, 2004, there are no draws available
under our Master Lease and Master Security credit facilities of approximately $2.5 million. The lease and credit facilities, secured by equipment and tenant improvements and bearing interest rates between 4.3% and 11.5%, were fully utilized by the
end of 2003. Pursuant to the terms of these credit facilities, we are required to maintain a balance of cash and investments of at least $20.5 million. In the event our cash and investments balance falls below $20.5 million, we are obligated to
provide the lessor with a continuing irrevocable letter of credit from a financial institution acceptable to the lessor in an amount equal to 100% of the outstanding balance of all indebtedness and loans. At June 30, 2004, we are in compliance with
the financial covenants.



At June 30, 2004, draws under our
Loan and Security Agreement credit facility totaled approximately $995,000, bearing interest rates between 5.91% and 6.39%. Approximately $505,000 remains available for future draws through July 2004. Pursuant to the terms of the credit facility, we
are required to maintain a balance of cash and investments with the lender of at least $5.0 million.



As of June 30, 2004, future payments under capital leases and loans are as follows (in thousands):



|                                  |  |                |     |       |   |       |  |   |      
|--------------------------------- |  | -------------- | --- | ----- | - | ----- |  | - | -----
|                                  |  | Capital Leases |     | Loans |   | Total
|2004                              |  |                | 150 |       |   | 500   |  |   | 650  
|2005                              |  |                | 318 |       |   | 980   |  |   | 1,298
|2006                              |  |                | 246 |       |   | 502   |  |   | 748  
|2007                              |  |                |    |       |   | 48    |  |   | 48   
|                                  |  |                |     |       |   |       |  |   |      
|Total                             |  | $              | 714 |       | $ | 2,030 |  |   | 2,744
|Less amount representing interest |  |                |     |       |   |       |  |   | 219  
|                                  |  |                |     |       |   |       |  |   |      
|Present value of future payments  |  |                |     |       |   |       |  |   | 2,525
|                                  |  |                |     |       |   |       |  |   |      
|Reported as current portion       |  |                |     |       |   |       |  | $ | 1,145
|                                  |  |                |     |       |   |       |  |   |      
|Non-current portion               |  |                |     |       |   |       |  | $ | 1,380
|                                  |  |                |     |       |   |       |  |   |      



7. Registration statement on Form
S-3



In April 2004, we filed a registration statement on
Form S-3 to offer and sell, from time to time, shares of our common stock in one or more offerings up to a total dollar amount of $200 million.



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##### Table of Contents

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



Special Note Regarding Statements of Expected Future Performance



This Quarterly Report on Form 10-Q contains statements indicating expectations about future performance and other forward-looking statements that involve
risks and uncertainties. We usually use words such as may, will, should, expect, plan, anticipate, believe, estimate, predict,
future, intend, potential, or continue or the negative of these terms or similar expressions to identify forward-looking statements. These statements appear throughout this Quarterly Report on Form
10-Q and are statements regarding our current intent, belief or expectation, primarily with respect to our operations and related industry developments. Examples of these statements include, but are not limited to, statements regarding the
following: the implications of positive interim results of our Phase 2 clinical trials, the progress of our research programs, including clinical testing, the extent to which our issued and pending patents may protect our products and technology,
our ability to identify new product candidates using TRAP technology (our proprietary Target-Related Affinity Profiling technology), the potential of such product candidates to lead to the development of safer or more effective therapies, our
ability to develop the technology derived from our collaborations, our anticipated timing for filing additional Investigational New Drug applications, or INDs, with the Food and Drug Administration or FDA, or for the initiation or completion of
Phase 1, Phase 2 or Phase 3 testing for any of our product candidates, our future operating expenses, our future losses, our future expenditures for research and development and the sufficiency of our cash resources. You should not place undue
reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including
the risks faced by us and described in the section of this Item 2 titled Additional Factors That May Affect Future Results and elsewhere in this Quarterly Report on Form 10-Q.



The following discussion and analysis should be read in conjunction with the unaudited financial statements and notes
thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with the financial statements and notes thereto and Managements Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual
Report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission on March 5, 2004.



Telik, the Telik logo, TRAP, TELCYTA and TELINTRA are trademarks of Telik, Inc. All other brand names or trademarks appearing in this
Quarterly Report on Form 10-Q are the property of their respective holders.



Overview



Telik is engaged in the discovery,
development and commercialization of small molecule therapeutics. We have incurred net losses since inception and expect to incur substantial and increasing losses for the next several years as we expand our research and development activities and
move our product candidates into later stages of development. As of June 30, 2004, we had an accumulated deficit of $200.9 million.



Our expenses have consisted primarily of those incurred for research and development and general and administrative costs associated with our operations.
The process of carrying out the development of our product candidates to later stages of development and our research programs may require significant additional research and development expenditures, including preclinical testing and clinical
trials, as well as for manufacturing development efforts and obtaining regulatory approval. We outsource our clinical trials and our manufacturing development activities to third parties to maximize efficiency and minimize our internal overhead. To
date, we have funded our operations primarily through the sale of equity securities and non-equity payments from collaborative partners.



We are subject to risks common to biopharmaceutical companies, including risks inherent in our research, development and commercialization efforts,
preclinical testing, clinical trials, uncertainty of regulatory and marketing approvals, enforcement of patent and proprietary rights, the need for future capital, potential competition, use of hazardous materials and retention of key employees. In
order for a



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##### Table of Contents

product to be commercialized, it will be necessary for us to conduct preclinical tests and clinical trials, demonstrate
efficacy and safety of our product candidates to the satisfaction of regulatory authorities, obtain marketing approval, enter into manufacturing, distribution and marketing arrangements, obtain market acceptance and, in many cases, obtain adequate
reimbursement from government and private insurers. We have not obtained regulatory approval for the commercial sale of any products, and we have not received any revenues from the commercial sale of products. We cannot provide assurance that we
will generate revenues, or achieve and sustain profitability, in the future.



We expect that our quarterly and annual results of operations will fluctuate for the foreseeable future due to several factors, including the timing and extent of our research and development efforts and the outcome
of our clinical trial activities. Our limited operating history makes accurate prediction of future operating results difficult or impossible.



Clinical Status



TELCYTA, our lead product candidate, is a small molecule tumor-activated cancer drug product candidate that we are evaluating initially to treat cancers
that are resistant to standard chemotherapy drugs. We initiated a Phase 3 registration trial of TELCYTA for the treatment of ovarian cancer in 2003 and a Phase 3 registration trial of TELCYTA in non-small cell lung cancer in March 2004. We have
completed a Special Protocol Assessment review by the FDA and have received Fast Track designation for both trials. In addition, we initiated two Phase 2 clinical trials of TELCYTA evaluated in combination with cisplatin and in combination with
carboplatin and paclitaxel in the front-line treatment of Stage IIIb or IV non-small cell lung cancer in 2004. TELCYTA is also being studied in patients with advanced breast cancer.



TELINTRA, our second product candidate, is a small molecule bone marrow stimulant that we are developing for the treatment
of blood disorders associated with low blood cell levels, such as neutropenia or anemia. Our Phase 1-2 clinical trial in MDS, a form of pre-leukemia, was initiated in April 2002 to establish the safety, dose limiting toxicities and maximum tolerated
dose of TELINTRA. This trial is on-going and has not identified a dose limiting toxicity.



We discovered all of our product candidates using our proprietary technology, Target-Related Affinity Profiling, or TRAP, which enables the rapid and efficient discovery of small molecule product candidates. We expect
to enter into collaborative arrangements with third parties for clinical trials, development, manufacturing, regulatory approvals or commercialization of some of our products, particularly outside North America, or in disease areas requiring larger
and longer clinical trials than cancer.



During the second
quarter of 2004 we announced the following:



| |  | The initiation of a new Phase 2 clinical trial in which TELCYTA will be evaluated in combination with carboplatin and paclitaxel in the front-line treatment of Stage IIIb or IV
non-small cell lung cancer (NSCLC) patients. Platinum and taxane-based drug combinations are the current standard for front-line chemotherapy of lung cancer.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Positive results from a Phase 2 clinical trial using the combination of TELCYTA and docetaxel in platinum resistant non-small cell lung cancer were presented at the 40thannual meeting of the American Society of Clinical Oncology, or ASCO, in New Orleans.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Positive results from a Phase 2 clinical trial using the combination of TELCYTA and carboplatin in patients with platinum refractory or resistant ovarian cancer were presented at
ASCO in New Orleans.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Positive results from a Phase 2 clinical trial using the combination of TELCYTA and liposomal doxorubicin in patients with platinum refractory or resistant ovarian cancer were
presented at ASCO in New Orleans.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Critical accounting policies and significant judgments and estimates



Our managements discussion and analysis of our financial condition and
results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. The preparation of these financial statements
requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses
during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments related to revenue recognition and clinical development costs. We base our estimates on historical experience and on various other factors that we believe are
reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under
different assumptions or conditions.



We believe the following
accounting policies are critical to the process of making significant judgments and estimates in the preparation of our financial statements.



Research and development expenses



Our research and development expenses include salaries and benefits costs, fees for contractors, consultants and third party contract research
organizations, and an allocation of facility and administrative costs. Research and development expenses consist of costs incurred for drug and product development, manufacturing, clinical activities, discovery research, screening and identification
of product candidates, and preclinical studies. All such costs are charged to research and development expenses as incurred.



Clinical development costs are a significant component of research and development expenses. We have a history of contracting with third parties that
perform various clinical trial activities on our behalf in the ongoing development of our product candidates. The financial terms of these contracts are subject to negotiation and may vary from contract to contract and may result in uneven payment
flows. We accrue and expense costs for clinical trial activities performed by third parties based upon estimates of the services completed to date on an individual study in accordance to agreements established with contract research organizations
and clinical trial sites. We determine our estimates through discussion with internal clinical personnel and schedules provided by outside service providers as to the progress or stage of completion of trials and the agreed upon fees to be paid for
such services. These estimates may or may not match the actual services performed by the organizations as determined by patient enrollment levels and related activities. We monitor patient enrollment levels and related activities to the extent
possible; however, if we underestimated activity levels associated with various studies at a given point in time, we could record significant research and development expenses in future periods.



Use of estimates



In preparing our financial statements to conform with accounting principles generally accepted in the United States, we make
estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Actual results may differ from these estimates.



Results of operations



Revenues



|                                   |  |                            |    |          |   |     |                          |     |          |  |   |    |  |   |     |  |     |   
|---------------------------------- |  | -------------------------- | -- | -------- | - | --- | ------------------------ | --- | -------- |  | - | -- |  | - | --- |  | --- | --
|                                   |  | Three months endedJune 30, |    | % Change |   |     | Six months endedJune 30, |     | % Change | 
|(in thousands, except percentages) |  | 2004                       |    | 2003     |   |     | 2004                     |     | 2003     | 
|Revenues                           |  | $                          | 44 |          | $ | 173 |                          | (75 | )%       |  | $ | 75 |  | $ | 423 |  | (82 | )%



Revenues in the three
and six months ended June 30, 2004 resulted primarily from our collaborative agreement with Roche, while revenues in the same period in 2003 resulted from our collaborative agreement with Sanwa. The decrease in revenues of $129,000, or 75%, for the
three months ended June 30, 2004 and $348,000, or 82%, for the six months ended June 30, 2004, was primarily due to the completion of our remaining collaboration with Sanwa in May 2003.



12



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##### Table of Contents

We expect near-term future revenues to fluctuate primarily depending upon the extent to which we enter
into new collaborative research agreements and the amounts of payments relating to such agreements.



Research and development expenses



Research and development expenses for the three months ended June 30, 2004 and 2003 were $15.6 million and $10.3 million. Research and development
expenses for the six months ended June 30, 2004 and 2003 were $28.8 million and $20.0 million. Our research and development activities consist primarily of drug development, clinical supply manufacturing, clinical activities, discovery research,
screening and identification of product candidates and preclinical studies. We group these activities into two major categories: research and preclinical and clinical development. Research and preclinical costs primarily
represent our new drug discovery efforts and preclinical work for our selected clinical candidates. Costs associated with clinical development represent the advancement of our existing product candidates through clinical trials.



The costs associated with research and preclinical and clinical development
activities approximated the following:



|                                   |  |                             |        |          |   |        |                           |    |          |  |   |        |  |   |        |  |    |  
|---------------------------------- |  | --------------------------- | ------ | -------- | - | ------ | ------------------------- | -- | -------- |  | - | ------ |  | - | ------ |  | -- | -
|                                   |  | Three Months Ended June 30, |        | % Change |   |        | Six Months Ended June 30, |    | % Change | 
|(In thousands, except percentages) |  | 2004                        |        | 2003     |   |        | 2004                      |    | 2003     | 
|Research and preclinical           |  | $                           | 4,210  |          | $ | 4,273  |                           | (1 | )%       |  | $ | 8,158  |  | $ | 7,974  |  | 2  | %
|Clinical development               |  |                             | 11,366 |          |   | 5,989  |                           | 90 | %        |  |   | 20,655 |  |   | 12,006 |  | 72 | %
|                                   |  |                             |        |          |   |        |                           |    |          |  |   |        |  |   |        |  |    |  
|Total research and development     |  | $                           | 15,576 |          | $ | 10,262 |                           | 52 | %        |  | $ | 28,813 |  | $ | 19,980 |  | 44 | %
|                                   |  |                             |        |          |   |        |                           |    |          |  |   |        |  |   |        |  |    |  



The increase of 52% or
$5.3 million in research and development expenses for the three months ended June 30, 2004 compared to the same period in 2003 was principally due to increased costs for the following:



| |  | TELCYTA
| | - | -------



| | - | costs associated with our Phase 3 registration trial in ovarian cancer and start-up costs associated with the initiation of our Phase 3 registration trial in non-small cell lung
cancer of $5.3 million and costs associated with Phase 2 clinical trials in ovarian and lung cancer in combination with standard chemotherapy drugs of $324,000 offset by a decrease in drug supply manufacturing costs of approximately $970,000; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Other expenses
| | - | --------------



| | - | approximately $887,000 associated with headcount growth and increased expenses to support clinical activities.
| | - | --------------------------------------------------------------------------------------------------------------



The increase of 44%, or $8.8 million, in research and development expenses
for the six months ended June 30, 2004 compared to the same period in 2003 was principally due to increased costs for the following:



| |  | TELCYTA
| | - | -------



| | - | costs associated with our Phase 3 registration trial in ovarian cancer and start-up costs associated with the initiation of our Phase 3 registration trial in non-small cell lung
cancer of $8.8 million offset by a decrease in drug supply manufacturing costs of approximately $2.3 million;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | TELINTRA
| | - | --------



| | - | clinical drug supply manufacturing costs of approximately $334,000 offset by a decrease in costs associated with the Phase 1-2a clinical trial in MDS of approximately $146,000; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Other expenses
| | - | --------------



| | - | approximately $2.1 million associated with headcount growth and increased expenses to support clinical activities.
| | - | ------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

We expect research and development expenditures to increase in the future as a result of increased
manufacturing and clinical development costs primarily relating to our TELCYTA and TELINTRA clinical development programs. The timing and the amount of these expenditures will depend upon the outcome of our ongoing clinical trials, the costs
associated with the Phase 3 clinical trials of TELCYTA, including related expansion of our research and development organization, regulatory requirements, advancement of our preclinical programs and product manufacturing costs.



The following table summarizes our principal product development programs,
including the related stages of development for each product in development and the research and development expenses recognized in connection with each product. The information in the column labeled Estimated Completion of Current Phase
is our current estimate of the timing of completion of product development phases. The actual timing of completion of those phases could differ materially from the estimates provided in the table. For a discussion of the risks and uncertainties
associated with the timing of completing a product development phase, see the All of our product candidates are in research and development. If clinical trials of TELCYTA and TELINTRA are delayed or unsuccessful or if we are unable to complete
the preclinical development of our other preclinical product candidates, our business may suffer, If we do not obtain regulatory approval to market products in the United States and foreign countries, we or our collaborators will not be
permitted to commercialize our product candidates, As our product programs advance, we will need to hire additional scientific and management personnel. Our research and development efforts will be seriously jeopardized if we are unable
to attract and retain key personnel, and If we are unable to contract with third parties to manufacture our product candidates or any products that we may develop in sufficient quantities and at an acceptable cost, clinical development
of product candidates could be delayed and we may be unable to meet demand for any products that we may develop and lose potential revenue sections of our Risk Factors below. For further information on our products refer to our Annual Report
on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission on March 5, 2004.



(in thousands)



|                                       |  |                                |  |                      |      |                               |        |                                               |        |        |   |       
|-------------------------------------- |  | ------------------------------ |  | -------------------- | ---- | ----------------------------- | ------ | --------------------------------------------- | ------ | ------ | - | ------
|                                       |  | Description                    |  | Phase of Development |      | Estimated Completion of Phase |        | Related R&D Expense Six Months Ended June 30,
|Product                                |  |                                |  |                      | 2004 |                               | 2003  
|TELCYTA                                |  |                                |  |                      |      |                               |        | $                                             | 20,377 |        | $ | 11,851
|                                       |  | Ovarian                        |  | Phase 3              |      | 2005                          |        |                                               |        |        |   |       
|                                       |  | Lung                           |  | Phase 3              |      | 2005                          |        |                                               |        |        |   |       
|                                       |  | Colorectal                     |  | Phase 2              |      | 2003                          |        |                                               |        |        |   |       
|                                       |  | Ovarian                        |  | Phase 2              |      | 2004                          |        |                                               |        |        |   |       
|                                       |  | Lung                           |  | Phase 2              |      | 2004                          |        |                                               |        |        |   |       
|                                       |  | Breast                         |  | Phase 2              |      | 2004                          |        |                                               |        |        |   |       
|                                       |  | Combination (with other drugs) |  | Phase 2              |      | 2004                          |        |                                               |        |        |   |       
|                                       |  |                                |  |                      |     
|TELINTRA                               |  | Myelodysplastic syndrome       |  | Phase 1/2            |      | 2005                          |        |                                               | 1,605  |        |   | 1,607 
|                                       |  |                                |  |                      |     
|Other (1)                              |  |                                |  |                      |      |                               |        |                                               | 6,831  |        |   | 6,522 
|                                       |  |                                |  |                      |      |                               |        |                                               |        |        |   |       
|Total research and development expense |  |                                |  |                      |      | $                             | 28,813 |                                               | $      | 19,980
|                                       |  |                                |  |                      |      |                               |        |                                               |        |        |   |       

---

|(1) | Other constitutes research and development activities performed by our Chemistry, Biology, Pre-clinical and Quality Assurance departments as these costs cannot be
allocated to any individual project.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The largest component of our total operating expenses is our ongoing investments in research and
development and, in particular, the clinical development of our product pipeline. The process of conducting the clinical research necessary to obtain FDA approval is costly and time consuming. Current FDA requirements for a new human drug to be
marketed in the United States include:



| |  | the successful conclusion of pre-clinical laboratory and animal tests, if appropriate, to gain preliminary information on the products safety;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  | filing with the FDA of an IND, to conduct human clinical trials for drugs;
| | - | --------------------------------------------------------------------------



| |  | the successful completion of adequate and well-controlled human clinical investigations to establish the safety and efficacy of the product for its recommended use; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | filing by a company and acceptance and approval by the FDA of a New Drug Application for a drug product to allow commercial distribution of the drug.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------



In light of the factors mentioned above, we consider the active management
and development of our clinical pipeline to be crucial to our long-term success. The actual probability of success for each candidate and clinical program may be impacted by a variety of factors, including, among others, the quality of the
candidate, the validity of the target and disease indication, early clinical data, investment in the program, competition, manufacturing capability and commercial viability. Due to these factors, it is difficult to give accurate guidance on the
anticipated proportion of our research and development investments or the future cash inflows from these programs.



General and administrative expenses



|                                   |  |                             |       |          |   |       |                           |    |          |  |   |       |  |   |       |  |    |  
|---------------------------------- |  | --------------------------- | ----- | -------- | - | ----- | ------------------------- | -- | -------- |  | - | ----- |  | - | ----- |  | -- | -
|                                   |  | Three Months Ended June 30, |       | % Change |   |       | Six Months Ended June 30, |    | % Change | 
|(In thousands, except percentages) |  | 2004                        |       | 2003     |   |       | 2004                      |    | 2003     | 
|General and administrative         |  | $                           | 2,734 |          | $ | 2,080 |                           | 31 | %        |  | $ | 5,353 |  | $ | 4,085 |  | 31 | %



The increase in
general and administrative expenses of 31%, or $654,000, in the three months ended June 30, 2004 was due primarily to increased costs for the following:



| |  | approximately $155,000 in costs associated with headcount growth and increased expenses necessary to manage the growth of our operations; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  | marketing expenses due to increased marketing program activities for TELCYTA of approximately $535,000.
| | - | -------------------------------------------------------------------------------------------------------



The increase in general and administrative expenses of 31%, or $1.3 million, in the six months ended June 30, 2004 was due
primarily to increased costs for the following:



| |  | approximately $410,000 in costs associated with headcount growth and increased expenses necessary to manage the growth of our operations; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  | marketing expenses due to increased marketing program activities for TELCYTA of approximately $892,000.
| | - | -------------------------------------------------------------------------------------------------------



We expect future general and administrative expenses to increase in support of expanded business activities, including costs
associated with our marketing efforts to support our commercialization strategy for TELCYTA.



Interest income and interest expense



|                                   |  |                            |     |   |          |   |     |                          |      |    |          |      |   |       |   |  |   |     |   |  |    |  
|---------------------------------- |  | -------------------------- | --- | - | -------- | - | --- | ------------------------ | ---- | -- | -------- | ---- | - | ----- | - |  | - | --- | - |  | -- | -
|                                   |  | Three Months EndedJune 30, |     |   | % Change |   |     | Six Months EndedJune 30, |      |    | % Change |     
|(In thousands, except percentages) |  | 2004                       |     |   | 2003     |   |     |                          | 2004 |    |          | 2003 |   |      
|Interest income                    |  | $                          | 591 |   |          | $ | 311 |                          |      | 90 | %        |      | $ | 1,200 |   |  | $ | 685 |   |  | 75 | %
|Interest expense                   |  |                            | (51 | ) |          |   | (40 | )                        |      | 28 | %        |      |   | (102  | ) |  |   | (52 | ) |  | 96 | %



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Interest income resulted primarily from earnings on investments. Interest income increased by $280,000,
or 90%, for the three months ended June 30, 2004 and $515,000, or 75%, for the six months ended June 30, 2004 compared to the same periods in 2003. The increases in the three-month and six-month periods ended June 30, 2004 were due to the higher
principal balance of our investments as a result of $142.8 million in net proceeds obtained from our follow-on offering in November 2003.



Interest expense increased by $11,000, or 28%, for the three months ended June 30, 2004 and $50,000, or 96%, for the six months ended June 30, 2004
compared to the same periods in 2003. The increases in interest expense reflected our utilization of our equipment loan facility.



Liquidity and capital resources



|                                                              |  |      |          |   |      |   |         |  
|------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | ------- | -
|(In millions, except ratio)                                   |  | 2004 |          |   | 2003 |  
|June 30:                                                      |  |      |          |   |      |   |         |  
|Cash, cash equivalents, investments and restricted cash       |  | $    | 172.0    |   |      | $ | 80.8    |  
|Working capital                                               |  | $    | 139.8    |   |      | $ | 61.1    |  
|Current ratio                                                 |  |      | 10.3 : 1 |   |      |   | 9.5 : 1 |  
|                                                              |  |     
|Six months ended June 30:                                     |  |      |          |   |      |   |         |  
|Cash provided by (used in):                                   |  |      |          |   |      |   |         |  
|Operating activities                                          |  | $    | (29.1    | ) |      | $ | (23.0   | )
|Investing activities                                          |  | $    | (2.5     | ) |      | $ | 5.3     |  
|Financing activities                                          |  | $    | 0.9      |   |      | $ | 2.9     |  
|Capital expenditures (included in investing activities above) |  | $    | (0.7     | ) |      | $ | (3.5    | )



Sources and Uses of
Cash. Since inception we have funded our research and development operations through sales of equity, collaborative arrangements with corporate partners, interest earned on investments and equipment lease financings. At June 30, 2004, we had
available cash, cash equivalents, investments and restricted investments of $172.0 million. Our cash and investment balances are held in a variety of interest-bearing instruments including obligations of U.S. government agencies, high-grade
corporate and municipal bonds, commercial paper and money market accounts. Cash in excess of immediate requirements is invested with regard to liquidity and capital preservation. Wherever possible, we seek to minimize the potential effects of
concentration and degrees of risk.



Cash Flows from
Operating Activities. Cash used in operations for the six months ended June 30, 2004 was $29.1 million compared with $23.0 million for the same period in 2003. Net loss of $33.0 million in 2004 included non-cash charges of $674,000 for
depreciation and amortization, $93,000 for the amortization of deferred stock compensation and $138,000 related to non-cash stock based compensation to non employees. Cash used in operations was further impacted by a decrease of $1.1 million in
accrued compensation due to bonus payouts at the beginning of the year and $328,000 in interest receivable. Cash usage was offset by approximately $3.9 million in accounts payable and accrued liabilities due to Phase 3 and Phase 2 clinical trials
activities. Operating cash outflows for the same period in 2003 resulted primarily from our net loss of $23.0 million. Other than non-cash charges of $803,000, cash used in operations was impacted by a decrease in accounts payable of $4.2 million
due to clinical trial and leasehold improvement expenses offset by $1.7 million received from our landlord to fund leasehold improvements and $1.9 million in accrued clinical trial expenses.



Cash Flows from Investing Activities. Cash used in investing
activities for the six months ended June 30, 2004 was $2.5 million compared with $5.3 million cash provided for the same period in 2003. Investing activities in 2004 were primarily related to the $1.8 million used in net purchases, sales and
maturities of investments and $680,000 equipment purchases. Cash used in the same period in 2003 was related to $6.8 million in net proceeds from sales and maturities of investments, $2.0 million in restricted cash for a security deposit on our Palo
Alto facility and $3.5 million in leasehold improvements and laboratory equipment purchases.



Cash Flows from Financing Activities. Cash provided by financing activities for the six months ended June 30, 2004 was approximately $879,000 compared with a $2.9 million for the same period in 2003.



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Financing activities in 2004 included approximately $627,000 in proceeds obtained through equipment loans and $754,000 in
proceeds from stock option exercises and our employee stock purchase plan, offset in part by $502,000 in payments under capital leases and equipment loan. Financing activities for the same period in 2003 were primarily due to $1.3 million in
proceeds obtained through an equipment loan, $1.7 million from stock option exercises and our employee stock purchase plan offset by $150,000 from payments under capital leases and equipment loans.



Working Capital. Working capital decreased to $139.8 million at June
30, 2004 from $172.6 million at December 31, 2003. The decrease in working capital was due to our use of cash in operations primarily due to the expansion of our TELCYTA development program and costs associated with headcount growth.



In April 2004, we drew down a total of $311,000 for equipment purchases from
our existing equipment loan facility at an interest rate of 6.39% payable over 36 months. At June 30, 2004, draws under this credit facility totaled approximately $995,000, and approximately $505,000 remains available for future draws through July
2004.



We believe our existing cash and investment securities
will be sufficient to support our current operating plan through 2005. We expect clinical development expenses to consume a large portion of our existing cash resources. Changes in our research and development plans or other changes affecting our
operating expenses may affect actual future consumption of existing cash resources as well. In any event, we will need to raise substantial additional capital to fund our operations in the future. We expect to finance our future cash needs through
the sale of equity securities, strategic collaborations and possibly debt financing or through other sources that may be dilutive to existing stockholders.



In addition, in the event that additional funds are obtained through arrangements with collaborative partners or other sources, such arrangements may
require us to relinquish rights to some of our technologies, product candidates or products under development that we would otherwise seek to develop or commercialize ourselves. Our future capital uses and requirements depend on numerous factors,
including the following:



| |  | the progress and success of preclinical studies and clinical trials of our product candidates;
| | - | ----------------------------------------------------------------------------------------------



| |  | the progress and number of research programs in development;
| | - | ------------------------------------------------------------



| |  | the costs associated with conducting Phase 3 clinical trials;
| | - | -------------------------------------------------------------



| |  | the costs and timing of obtaining regulatory approvals;
| | - | -------------------------------------------------------



| |  | our ability to establish, and the scope of, any new collaborations;
| | - | -------------------------------------------------------------------



| |  | our ability to meet the milestones identified in our collaborative agreements that trigger payments;
| | - | ----------------------------------------------------------------------------------------------------



| |  | the costs and timing of obtaining, enforcing and defending our patent and intellectual property rights;
| | - | -------------------------------------------------------------------------------------------------------



| |  | competing technological and market developments; and
| | - | ----------------------------------------------------



| |  | the timing and scope of commercialization expenses for our product candidates as they approach regulatory approval.
| | - | -------------------------------------------------------------------------------------------------------------------



We currently have no commitments for any additional financings. If we need to
raise additional money to fund our operations, funding may not be available to us on acceptable terms, or at all. If we are unable to raise additional funds when needed, we may not be able to market our products as planned or continue development of
our products, or we could be required to delay, scale back or eliminate some or all of our research and development programs. We may seek to raise any necessary additional funds through equity or debt financings, collaborative arrangements with
corporate partners or other sources. To the extent that we raise additional capital through licensing arrangements or arrangements with collaborative partners, we may be required to relinquish, on terms that are not favorable to us, rights to some
of our technologies or product candidates that we would otherwise seek to develop or commercialize ourselves.



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Our future contractual obligations at June 30, 2004 are as follows (in thousands):



|                                   |  |       |        |      |   |           |  |           |        |            |   |       |  |   |       
|---------------------------------- |  | ----- | ------ | ---- | - | --------- |  | --------- | ------ | ---------- | - | ----- |  | - | ------
|                                   |  | Total |        | 2004 |   | 2005-2006 |  | 2007-2008 |        | After 2008
|Capital lease obligations          |  | $     | 714    |      | $ | 150       |  | $         | 564    |            | $ |      |  | $ |      
|Equipment loan                     |  |       | 2,030  |      |   | 500       |  |           | 1,482  |            |   | 48    |  |   |      
|Operating leases                   |  |       | 37,319 |      |   | 1,853     |  |           | 8,498  |            |   | 6,875 |  |   | 20,093
|                                   |  |       |        |      |   |           |  |           |        |            |   |       |  |   |       
|Total contractual cash obligations |  | $     | 40,063 |      | $ | 2,503     |  | $         | 10,544 |            | $ | 6,923 |  | $ | 20,093
|                                   |  |       |        |      |   |           |  |           |        |            |   |       |  |   |       



ADDITIONAL FACTORS
THAT MAY AFFECT FUTURE RESULTS



You should carefully
consider these risk factors as each of these risks could adversely affect our business, operating results and financial condition.



We have a history of net losses, which we expect to continue for at least several years. We will never be profitable unless we develop, and obtain regulatory approval
and market acceptance of, our product candidates.



Due to
the significant research and development expenditures required to develop our TRAP technology and identify new product candidates, and the lack of any products to generate revenue, we have not been profitable and have incurred operating losses since
we were incorporated in 1988. As of June 30, 2004, we had an accumulated deficit of $200.9 million. We expect to incur losses for at least the next several years and expect that these losses will increase as we expand our research and development
activities and incur significant clinical testing costs. We do not anticipate that we will generate product revenue for several years. Our losses, among other things, have caused and will cause our stockholders equity and working capital to
decrease. To date, we have derived substantially all of our revenues, which have not been significant, from project initiation fees and research reimbursement paid pursuant to existing collaborative agreements with third parties and achievement of
milestones under current collaborations. We expect that this trend will continue until we develop, and obtain regulatory approval and market acceptance of, our product candidates, if at all. We may never generate product revenue sufficient to become
profitable.



All of our product candidates are in research and development.
If clinical trials of TELCYTA or TELINTRA are delayed or unsuccessful or if we are unable to complete the preclinical development of our other preclinical product candidates, our business may suffer.



Preclinical testing and clinical trials are long, expensive and uncertain
processes. It may take us or our collaborators several years to complete this testing, and failure can occur at any stage of the process. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be
successful, and interim results of trials do not necessarily predict final results. A number of companies in the pharmaceutical industry, including biotechnology companies, have suffered significant setbacks in advanced clinical trials, even after
promising results in earlier trials.



TELCYTA has to date been
evaluated in Phase 1 and Phase 2 clinical trials. We initiated a Phase 3 registration trial of TELCYTA in ovarian cancer in the first quarter of 2003 and a Phase 3 registration trial of TELCYTA in non small cell lung cancer in March 2004. These
trials test TELCYTA against a control arm consisting of currently established standard drug treatments for these cancers. Changes in standards of care during our Phase 3 trials may cause us to, or the FDA may require us to, perform additional
clinical testing of TELCYTA against a different control arm prior to filing a New Drug Application for marketing approval.



We are currently in a Phase 1-2 clinical trial of TELINTRA in MDS, a form of pre-leukemia, to evaluate safety, pharmacokinetics, pharmacodynamics and
efficacy. Our success depends, in part, on our ability to complete clinical development of TELINTRA or other preclinical product candidates and take them through early clinical trials.



Any clinical trial may fail to produce results satisfactory to the FDA. Preclinical and clinical data can be interpreted in
different ways, which could delay, limit or prevent regulatory approval. Negative or inconclusive results or adverse medical events during a clinical trial could cause a clinical trial to be



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repeated or a program to be terminated. We typically rely on third-party clinical investigators to conduct our clinical
trials and, as a result, we may face additional delays outside our control. We have engaged contract research organizations, or CROs, to facilitate the administration of our Phase 3 trials of TELCYTA. Dependence on a CRO will subject us to a number
of risks. Delays in identifying and engaging a CRO may result in delays in the initiation of other clinical trials. We may not be able to control the amount and timing of resources the CRO may devote to our trials. Should the CRO fail to administer
our Phase 3 trials properly, regulatory approval, development and commercialization of TELCYTA will be delayed.



We do not know whether we will begin planned clinical trials on time or whether we will complete any of our ongoing clinical trials on schedule, if at
all. We do not know whether any clinical trials will result in marketable products. Typically, there is a high rate of attrition for product candidates in preclinical and clinical trials. We do not anticipate that any of our product candidates will
reach the market for at least several years.



Significant
delays in clinical testing could materially impact our product development costs. We do not know whether planned clinical trials will begin on time, will need to be revamped or will be completed on schedule, if at all. In addition to the reasons
stated above, clinical trials can be delayed for a variety of reasons, including delays in obtaining regulatory approval to commence a study, delays in reaching agreement on acceptable clinical study agreement terms with prospective clinical sites,
delays in obtaining institutional review board approval to conduct a study at a prospective clinical site and delays in recruiting subjects to participate in a study.



While we have not yet experienced delays that have materially impacted our clinical trials or product development costs,
delays of this sort could occur for the reasons identified above or other reasons. If we have delays in testing or approvals, our product development costs will increase. For example, we may need to make additional payments to third-party
investigators and organizations to retain their services or we may need to pay recruitment incentives. If the delays are significant, our financial results and the commercial prospects for our product candidates will be harmed, and our ability to
become profitable will be delayed.



We believe that our ability to compete
depends, in part, on our ability to use our proprietary TRAP technology to discover new pharmaceutical products.



TRAP, our proprietary drug discovery technology, is a relatively new drug discovery method that uses a protein panel of approximately 20 proteins selected
for their distinct patterns of interacting with small molecules. This panel may lack essential types of interactions that we have not yet identified, which may result in our inability to identify active compounds that have the potential for us to
develop into commercially viable drugs.



If we are unable to raise adequate
funds in the future, we will not be able to continue to fund our operations, research programs, preclinical testing and clinical trials to develop our product candidates.



The process of carrying out the development of our own unpartnered product candidates to later stages of development and
developing other research programs to the stage that they may be partnered will require significant additional expenditures, including the expenses associated with preclinical testing, clinical trials and obtaining regulatory approval. We believe
that our existing cash and investment securities will be sufficient to support our current operating plan through 2005. Changes in our research and development plans or other changes affecting our operating expenses may affect actual future
consumption of existing cash resources as well. In any event, we will require substantial additional financing to fund our operations in the future. We do not know whether additional financing will be available when needed or that, if available, we
will obtain financing on terms favorable to our stockholders. As of June 30, 2004, our accumulated deficit was $200.9 million, and we expect capital outlays and operating expenditures to increase over the next several years as we expand our
clinical, research and development activities. The extent of any actual increase in operating or capital spending will depend in part on the clinical success of our product candidates.



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Raising additional capital by issuing securities or through collaboration and licensing arrangements may cause
dilution to existing stockholders or require us to relinquish rights to our technologies or product candidates.



We may seek to raise any necessary additional funds through equity or debt financings, collaborative arrangements with corporate partners or other
sources. To the extent that we raise additional capital by issuing equity securities, our stockholders may experience dilution. To the extent that we raise additional capital through licensing arrangements or arrangements with collaborative
partners, we may be required to relinquish, on terms that are not favorable to us, rights to some of our technologies or product candidates that we would otherwise seek to develop or commercialize ourselves.



If our competitors develop and market products that are more effective than our product
candidates or any products that we may develop, or obtain marketing approval before we do, our commercial opportunity will be reduced or eliminated.



The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. Some of the drugs
that we are attempting to develop, such as TELINTRA, will have to compete with existing therapies. In addition, a large number of companies are pursuing the development of pharmaceuticals that target the same diseases and conditions that we are
targeting. We face competition from pharmaceutical and biotechnology companies in the United States and abroad. Our competitors may develop new screening technologies and may utilize discovery techniques or partner with collaborators in order to
develop products more rapidly or successfully than we or our collaborators are able to do.



Many of our competitors, particularly large pharmaceutical companies, have substantially greater financial, technical and human resources than we do. These organizations also compete with us to attract qualified
personnel and parties for acquisitions, joint ventures, licensing arrangements or other collaborations. In addition, academic institutions, government agencies and other public and private organizations conducting research may seek patent protection
with respect to potentially competing products or technologies and may establish exclusive collaborative or licensing relationships with our competitors.



Our competitors may succeed in developing technologies and drugs that are more effective, better tolerated or less costly than any which are being
developed by us or which would render our technology and potential drugs obsolete and noncompetitive. In addition, our competitors may succeed in obtaining FDA or other regulatory approvals for product candidates more rapidly than us or our
collaborators. Any drugs resulting from our research and development efforts, or from our joint efforts with our existing or future collaborative partners, may not be able to compete successfully with our competitors existing products or
products under development or may not obtain regulatory approval in the United States or elsewhere.



If we do not obtain regulatory approval to market products in the United States and foreign countries, we or our collaborators will not be permitted to commercialize our product candidates.



Even if we are able to achieve success in our preclinical testing, we, or
our collaborators, must provide the FDA and foreign regulatory authorities with clinical data that demonstrate the safety and efficacy of our product candidates in humans before they can be approved for commercial sale. Failure to obtain regulatory
approval will prevent commercialization of our product candidates.



The pharmaceutical industry is subject to stringent regulation by a wide range of authorities. We cannot predict whether regulatory clearance will be obtained for any product candidate that we are developing or hope to develop. A
pharmaceutical product cannot be marketed in the United States until it has completed rigorous preclinical testing and clinical trials and an extensive regulatory clearance process implemented by the FDA. Satisfaction of regulatory requirements
typically takes many years and depends on the type, complexity and novelty of the product and requires the expenditure of substantial resources. Of particular significance are the requirements covering research and development, testing,
manufacturing, quality control, labeling and promotion of drugs for human use.



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Before commencing clinical trials in humans, we, or our collaborators, must submit and receive approval
from the FDA of an IND application. We must comply with FDA Good Laboratory Practices regulations in our preclinical studies. Clinical trials are subject to oversight by institutional review boards of participating clinical sites and the
FDA and:



| |  | must be conducted in conformance with the FDA regulations;
| | - | ----------------------------------------------------------



| |  | must meet requirements for institutional review board approval;
| | - | ---------------------------------------------------------------



| |  | must meet requirements for informed consent;
| | - | --------------------------------------------



| |  | must meet requirements for Good Clinical Practices;
| | - | ---------------------------------------------------



| |  | may require large numbers of participants; and
| | - | ----------------------------------------------



| |  | may be suspended by us, our collaborators or the FDA at any time if it is believed that the subjects participating in these trials are being exposed to unacceptable health risks or
if the FDA finds deficiencies in the IND application or the conduct of these trials.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Before receiving FDA clearance to market a product, we or our collaborators must demonstrate that the product candidate is safe and effective in the
patient population that will be treated. Negative or inconclusive results or adverse medical events during a clinical trial could cause a clinical trial to be repeated, a program to be terminated and could delay approval. We typically rely on
third-party clinical investigators to conduct our clinical trials and other third party organizations to perform data collection and analysis and, as a result, we may face additional delaying factors outside our control. In addition, we may
encounter delays or rejections based upon additional government regulation from future legislation or administrative action or changes in FDA policy or interpretation during the period of product development, clinical trials and FDA regulatory
review. Failure to comply with applicable FDA or other applicable regulatory requirements may result in criminal prosecution, civil penalties, recall or seizure of products, total or partial suspension of production or injunction, as well as other
regulatory action. We have limited experience in conducting and managing the clinical trials necessary to obtain regulatory approval.



If regulatory clearance of a product is granted, this clearance will be limited to those disease states and conditions for which the product is
demonstrated through clinical trials to be safe and efficacious, which could limit our market opportunity. Furthermore, product approvals, once granted, may be withdrawn if problems occur after initial marketing. We cannot ensure that any compound
developed by us, alone or with others, will prove to be safe and efficacious in clinical trials and will meet all of the applicable regulatory requirements needed to receive marketing clearance.



Outside the United States, the ability to market a product depends on
receiving a marketing authorization from the appropriate regulatory authorities. This foreign regulatory approval process typically includes all of the risks associated with FDA clearance described above and may include additional risks.



As our product programs advance, we will need to hire additional scientific and
management personnel. Our research and development efforts will be seriously jeopardized if we are unable to attract and retain key personnel.



Our success depends in part on the continued contributions of our principal management and scientific personnel and on our ability to develop and maintain
important relationships with leading academic institutions, scientists and companies in the face of intense competition for such personnel. As we plan for and commence additional advanced clinical trials, including Phase 2 and Phase 3, we will also
need to expand our clinical development personnel. In addition, our research programs depend on our ability to attract and retain highly skilled chemists and other scientists. None of our key employees have indicated to Telik that they have plans to
retire or leave Telik in the near future. If we lose the services of Dr. Wick or any of our other key personnel, our research and development efforts could be seriously and adversely affected. We have generally entered into consulting or other
agreements with our scientific and clinical collaborators and advisors. We do not carry key person insurance that covers Dr. Wick or any of our other key employees. There is currently a shortage of skilled executives and employees with technical
expertise in the biotechnology industry, and this shortage is likely to continue. As a result, competition among numerous companies, academic and other research institutions for skilled personnel and experienced scientists is intense and turnover
rates are high. The cost of living in the San Francisco Bay Area is very high compared to other parts of the country, which we expect will adversely affect our ability to compete for qualified personnel and will increase costs. Because of this
competitive environment, we have



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encountered and may continue to encounter increasing difficulty in attracting qualified personnel as our operations
expand and the demand for these professionals increases, and this difficulty could significantly impede the achievement of our research and development objectives.



If physicians and patients do not accept products that we may develop, our ability to generate product revenue in the future will be
adversely affected.



Products that we may develop may not
gain market acceptance among physicians, healthcare payors, patients and the medical community. Market acceptance of and demand for any products that we may develop will depend on many factors, including the following:



| |  | our ability to provide acceptable evidence of safety and efficacy;
| | - | ------------------------------------------------------------------



| |  | convenience and ease of administration;
| | - | ---------------------------------------



| |  | cost effectiveness;
| | - | -------------------



| |  | the effectiveness of our marketing strategy and the pricing of any products that we may develop;
| | - | ------------------------------------------------------------------------------------------------



| |  | our ability to obtain third-party coverage or reimbursement; and
| | - | ----------------------------------------------------------------



| |  | the prevalence and severity of adverse side effects.
| | - | ----------------------------------------------------



Physicians may elect not to recommend products that we may develop even if we meet the above criteria. If any product that we may develop fails to achieve
market acceptance, we may not be able to successfully market and sell the product, which would limit our ability to generate revenue and adversely affect our operations.



If we or our licensees cannot obtain and defend our respective intellectual property rights, or if our product candidates, technologies
or any products that we may develop are found to infringe patents of third parties, we could become involved in lengthy and costly legal proceedings that could adversely affect our business.



Our success will depend in a large part on our own and our licensees
ability to obtain and defend patents for each partys respective technologies and the compounds and other products, if any, resulting from the application of these technologies. The patent positions of pharmaceutical and biotechnology companies
can be highly uncertain and involve complex legal and factual questions. As a result, the degree of future protection for our proprietary rights is uncertain, and we cannot assure you that:



| |  | we were the first to make the inventions covered by each of our pending patent applications;
| | - | --------------------------------------------------------------------------------------------



| |  | we were the first to file patent applications for these inventions;
| | - | -------------------------------------------------------------------



| |  | others will not independently develop similar or alternative technologies or duplicate any of our technologies;
| | - | ---------------------------------------------------------------------------------------------------------------



| |  | any of our pending patent applications will result in issued patents;
| | - | ---------------------------------------------------------------------



| |  | any patents issued to us or our collaborators will provide a basis for commercially viable products, will provide us with any competitive advantages or will not be challenged by
third parties;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | any of our issued patents will be valid or enforceable; or
| | - | ----------------------------------------------------------



| |  | we will develop additional proprietary technologies that are patentable.
| | - | ------------------------------------------------------------------------



Accordingly, we cannot predict the breadth of claims allowed in our or other companies patents.



For TRAP, we hold patents in the United States and internationally, including
a pending foreign application. These patents, and any patent that may issue on the pending application, will expire between 2013 and 2015. For TELCYTA, we hold compound patents in the United States and internationally, including a pending foreign
application. These patents, and any patent that may issue on the pending application, will expire in 2013 and 2014. For TELINTRA, we hold compound patents in the United States and internationally, including a pending foreign application. These
patents, and any patent that may issue on the pending application, will expire in 2014. We can generally apply for patent term extensions on the patents for TELCYTA and TELINTRA when and if marketing approvals for these compounds are obtained in the
relevant countries.



Our success will also depend, in part, on
our ability to operate without infringing the intellectual property rights of others. We cannot assure you that our activities will not infringe patents owned by others.



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As of the date of this Quarterly Report on Form 10-Q, we have not received any communications with the owners of related
patents alleging that our activities infringe their patents. However, if our product candidates, technologies or any products that we may develop are found to infringe patents issued to third parties, the manufacture, use and sale of any products
that we may develop could be enjoined, and we could be required to pay substantial damages. In addition, we may be required to obtain licenses to patents or other proprietary rights of third parties. We cannot assure you that any licenses required
under any such patents or proprietary rights would be made available on terms acceptable to us, if at all. Failure to obtain such licenses could negatively affect our business.



Others may have filed and in the future may file patent applications covering small molecules or therapeutic products that
are similar to ours. We cannot assure you that our patent applications will have priority over patent applications filed by others. Any legal action against us or our collaborators claiming damages and seeking to enjoin commercial activities
relating to the affected products and processes could, in addition to subjecting us to potential liability for damages, require us or our collaborators to obtain a license to continue to manufacture or market the affected products and processes. We
cannot predict whether we, or our collaborators, would prevail in any of these actions or that any license required under any of these patents would be made available on commercially acceptable terms, if at all. We believe that there may be
significant litigation in the industry regarding patent and other intellectual property rights. If we become involved in litigation, it could consume a substantial portion of our managerial and financial resources, and we may not be successful in
any such litigation.



In addition, we could incur substantial
costs and use of our key employees time and efforts in litigation if we are required to defend against patent suits brought by third parties or if we initiate these suits, and we cannot predict whether we would be able to prevail in any of
these suits.



Furthermore, some of our patents and intellectual
property rights are owned jointly by us and our collaborators. While there are legal and contractual restraints on the rights of these joint owners, they may use these patents and other intellectual property in ways that may harm our business. We
may not be able to prevent this type of use.



We also rely on
trade secrets to protect technology, including aspects of our TRAP technology, where we believe patent protection is not appropriate or obtainable. However, trade secrets are difficult to protect. While we require employees, academic collaborators
and consultants to enter into confidentiality agreements, we may not be able to adequately protect our trade secrets or other proprietary information in the event of any unauthorized use or disclosure or the lawful development by others of such
information. If the identity of specific proteins or other elements of our TRAP technology become known, our competitive advantage in drug discovery could be reduced.



Many of our collaborators and scientific advisors have publication and other rights to certain information and data gained
from their collaboration and research with us. Any publication or other use could limit our ability to secure intellectual property rights or impair any competitive advantage that we may possess or realize by maintaining the confidentiality of the
information or data.



We will depend on collaborative arrangements to
complete the development and commercialization of some of our product candidates. These collaborative arrangements may place the development of our product candidates outside of our control, may require us to relinquish important rights or may
otherwise not be on terms favorable to us.



We expect to
enter into collaborative arrangements with third parties for clinical trials, development, manufacturing, regulatory approvals or commercialization of some of our product candidates, particularly outside North America, or in disease areas requiring
larger and longer clinical trials, such as diabetes. Dependence on collaborative arrangements will subject us to a number of risks. We may not be able to control the amount and timing of resources our collaborative partners may devote to the product
candidates. Our collaborative partners may experience financial difficulties. Should a collaborative partner fail to develop or commercialize a compound or product candidate to which it has rights from us, we may not receive any future milestone
payments and will not receive any royalties for this compound or product candidate. Business combinations or significant changes in a collaborative partners business strategy may also adversely affect a partners willingness or ability to
complete its obligations under the arrangement. If we fail to enter into additional collaborative agreements on favorable terms, our business, financial condition and results of operations could be materially adversely affected.



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Under our existing collaboration agreements, we are entitled to payments upon future product sales or the
achievement of milestones. For example, under our arrangement with Sanwa, we may be entitled to payments of up to $10.0 million. However, we cannot assure you that any product will be successfully developed and commercialized under these
collaborations or that we will receive any of these payments.



Some of our collaborations are for early stage programs and allow partners significant discretion in electing whether to pursue any of the planned activities. We do not anticipate significant revenues to result from these relationships
until the collaborator has advanced product candidates into clinical trials, which will not occur for several years, if at all. These arrangements are subject to numerous risks, including the right of the collaboration partner to control the timing
of the research and development efforts, the advancement of lead product candidates to clinical trials and the commercialization of product candidates. In addition, a collaborative partner could independently move forward with a competing lead
candidate developed either independently or in collaboration with others, including our competitors.



If we are unable to contract with third parties to manufacture our product candidates or any products that we may develop in sufficient quantities and at an acceptable cost, clinical development of product
candidates could be delayed and we may be unable to meet demand for any products that we may develop and lose potential revenue.



We do not currently operate manufacturing facilities for clinical or commercial production of our product candidates. We expect to continue to rely on
third parties for the manufacture of our product candidates and any products that we may develop. We currently lack the resources and capability to manufacture any of our product candidates on a clinical scale or any products that we may develop on
a commercial scale. As a result, we will be dependent on corporate partners, licensees or other third parties for the manufacturing of clinical and commercial scale quantities of our product candidates and any products that we may develop. Our
product candidates and any products that we may develop may be in competition with other product candidates and products for access to these facilities. For this and other reasons, our collaborators or third parties may not be able to manufacture
these product candidates and products in a cost effective or timely manner. While we currently possess sufficient inventory of TELCYTA and TELINTRA that are stored in multiple locations and additional substantial quantity of the active ingredient in
TELCYTA, if these inventories are lost or damaged, the clinical development of our product candidates or their submission for regulatory approval could be delayed, and our ability to deliver any products that we may develop on a timely basis could
be impaired or precluded.



Since our two affiliated sources for
supply of active ingredients in TELCYTA, Organichem Corporation and Albany Molecular Research Inc., merged during 2003, we are currently dependent on a single source supply of the active ingredient and are working to identify additional sources. We
presently depend on a single source of supply for clinical quantities of the active ingredient in TELINTRA, Bachem Corporation, and a single source of supply for a key excipient used in the formulation of TELINTRA, Lipoid GmbH. Cardinal Health, Inc.
is our sole formulator of TELCYTA and TELINTRA. While these suppliers and formulator currently meet our preclinical and clinical trial requirements, we currently do not have supply agreements with any of these entities, other than with Cardinal
Health. While we are presently evaluating potential alternative sources of these materials or formulation services, we currently do not have any such alternative sources that are immediately available. If formulation is not performed in a timely
manner, if our suppliers fail to perform or if our relationships with our suppliers or formulator should terminate, our clinical trials and commercialization of TELCYTA and TELINTRA could be delayed. We may not be able to enter into any necessary
third-party manufacturing arrangements on acceptable terms, if at all. Our current dependence upon others for the manufacture of our product candidates and our anticipated dependence upon others for the manufacture of any products that we may
develop may adversely affect our future profit margins and our ability to commercialize any products that we may develop on a timely and competitive basis.



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If we are unable to create sales, marketing and distribution capabilities or enter into agreements with third parties
to perform these functions, we will not be able to commercialize any products that we may develop.



We currently have no sales, marketing or distribution capabilities. In order to commercialize any products that we may develop, we must internally develop
sales, marketing and distribution capabilities or establish collaborations or other arrangements with third parties to perform these services. We intend to market some products that we may develop directly in North America and rely on relationships
with one or more pharmaceutical companies with established distribution systems and direct sales forces to market other products that we may develop and address other markets. We may not be able to establish in-house sales and distribution
capabilities or relationships with third parties. To the extent that we enter into co-promotion or other licensing arrangements, any product revenues are likely to be lower than if we directly marketed and sold any products that we may develop, and
any revenues we receive will depend upon the efforts of third parties, whose efforts may not be successful.



Budget constraints may force us to delay our efforts to develop certain product candidates in favor of developing others, which may prevent us from commercializing all product candidates as quickly as possible.



Because we are an emerging company with limited
resources, and because research and development is an expensive process, we must regularly assess the most efficient allocation of our research and development budget. As a result, we may have to prioritize development candidates and may not be able
to fully realize the value of some of our product candidates in a timely manner, as they will be delayed in reaching the market, if at all.



If product liability lawsuits are successfully brought against us, we may incur substantial liabilities and may be required to limit commercialization of our product
candidates and any products that we may develop.



The
testing and marketing of medical products entail an inherent risk of product liability. Although we are not aware of any historical or anticipated product liability claims or specific causes for concern, if we cannot successfully defend ourselves
against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates and any products that we may develop. In addition, product liability claims may also result in withdrawal of
clinical trial volunteers, injury to our reputation and decreased demand for any products that we may commercialize. We currently carry product liability insurance that covers our clinical trials up to a $10 million annual aggregate limit. We will
need to increase the amount of coverage if and when we have a product that is commercially available. If we are unable to obtain sufficient product liability insurance at an acceptable cost, potential product liability claims could prevent or
inhibit the commercialization of any products that we may develop, alone or with corporate collaborators.



If we use biological and hazardous materials in a manner that causes injury, we may be liable for damages.



Our research and development activities involve the controlled use of potentially harmful biological materials, hazardous materials, chemicals and various
radioactive compounds, and are subject to federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. While to our knowledge we have not been in violation of any
environmental laws, nor have we been the subject of any investigation for violations of environmental laws in the past, we cannot completely eliminate the risk of accidental contamination or injury from the use, storage, handling or disposal of
these materials. We currently have $275,000 in insurance coverage, which we believe is a reasonably adequate amount to insulate us from damage claims arising from our use of hazardous materials. However, in the event of contamination or injury, we
could be held liable for damages that result, and any liability could exceed our resources.



We have implemented anti-takeover provisions which could discourage or prevent a takeover, even if an acquisition would be beneficial to our stockholders and may prevent attempts by our stockholders to replace or
remove our current management.



Provisions of our amended
and restated certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us, even if doing so would be



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beneficial to our stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders
to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Because our board of directors is responsible for appointing the members of our management team, these provisions
could in turn affect any attempt by our stockholders to replace current members of our management team. These provisions include:



| |  | establishing a classified board of directors requiring that members of the board be elected in different years, which lengthens the time needed to elect a new majority of the board;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | authorizing the issuance of blank check preferred stock that could be issued by our board of directors to increase the number of outstanding shares or change the balance
of voting control and thwart a takeover attempt;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | prohibiting cumulative voting in the election of directors, which would otherwise allow for less than a majority of stockholders to elect director candidates;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | limiting the ability of stockholders to call special meetings of the stockholders;
| | - | ----------------------------------------------------------------------------------



| |  | prohibiting stockholder action by written consent and requiring all stockholder actions to be taken at a meeting of our stockholders; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------



| |  | establishing 90 to 120 day advance notice requirements for nominations for election to the board of directors and for proposing matters that can be acted upon by stockholders at
stockholder meetings.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We adopted a stockholder rights plan
that may discourage, delay or prevent a merger or acquisition that is beneficial to our stockholders.



In November 2001, our board of directors adopted a stockholder rights plan that may have the effect of discouraging, delaying or preventing a merger or
acquisition that is beneficial to our stockholders by diluting the ability of a potential acquiror to acquire us. Pursuant to the terms of our plan, when a person or group, except under certain circumstances, acquires 20% or more of our outstanding
common stock or 10 business days after commencement or announcement of a tender or exchange offer for 20% or more of our outstanding common stock, the rights (except those rights held by the person or group who has acquired or announced an offer to
acquire 20% or more of our outstanding common stock) would generally become exercisable for shares of our common stock at a discount. Because the potential acquirors rights would not become exercisable for our shares of common stock at a
discount, the potential acquiror would suffer substantial dilution and may lose its ability to acquire us. In addition, the existence of the plan itself may deter a potential acquiror from acquiring us. As a result, either by operation of the plan
or by its potential deterrent effect, mergers and acquisitions of us that our stockholders may consider in their best interests may not occur.



Substantial future sales of our common stock by us or by our existing stockholders could cause our stock price to fall.



Additional equity financings or other share issuances by us, including
shares issued in connection with strategic alliances, could adversely affect the market price of our common stock. Sales by existing stockholders of a large number of shares of our common stock in the public market or the perception that additional
sales could occur could cause the market price of our common stock to drop. As of June 30, 2004, we had 43,692,422 shares of our common stock outstanding, of which 42,006,011 shares were freely tradable and 1,686,411 shares were transferable in
accordance with certain volume and manner of sale restrictions under Rule 144. The holder of approximately 1.5 million shares of our common stock is entitled to registration rights. If we propose to register any of our securities under the
Securities Act of 1933, as amended, the holder of these shares is entitled to notice of the registration and is entitled to include, at our expense, its shares of common stock in the registration and any related underwriting. However, among other
conditions, the underwriters may limit the number of shares to be included in the registration. In addition, the holder of these shares may require us, at our expense, on not more than two occasions and subject to certain limitations, to file a
registration statement under the Securities Act with respect to its shares of common stock, and we will be required to use our best efforts to effect the registration.



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If we do not progress in our programs as anticipated, our stock price could decrease.



For planning purposes, we estimate the timing of a variety of clinical,
regulatory and other milestones, such as when a certain product candidate will enter clinical development, when a clinical trial will be completed or when an application for regulatory approval will be filed. Some of our estimates are included in
this Quarterly Report on Form 10-Q. Our estimates are based on present facts and a variety of assumptions. Many of the underlying assumptions are outside of our control. If milestones are not achieved when we expect them to be, investors could be
disappointed, and our stock price may decrease.



Our stock price may be
volatile, and you may not be able to resell your shares at or above your purchase price.



Our stock prices and the market prices for securities of biotechnology companies in general have been highly volatile, with recent significant price and volume fluctuations, and may continue to be highly volatile in
the future. During 2003, our common stock traded between $23.31 and $10.02 and during the first half of 2004, our common stock traded between $29.67 and $20.21. You may not be able to sell your shares quickly or at the market price if trading in our
stock is not active or the volume is low. The following factors, in addition to other risk factors described in this section, may have a significant impact on the market price of our common stock, some of which are beyond our control:



| |  | developments regarding, or the results of, our clinical trials, including TELCYTA clinical trials;
| | - | --------------------------------------------------------------------------------------------------



| |  | announcements of technological innovations or new commercial products by our competitors or us;
| | - | -----------------------------------------------------------------------------------------------



| |  | developments concerning proprietary rights, including patents;
| | - | --------------------------------------------------------------



| |  | developments concerning our collaborations; publicity regarding actual or potential medical results relating to products under development by our competitors or us;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | regulatory developments in the United States and foreign countries;
| | - | -------------------------------------------------------------------



| |  | litigation;
| | - | -----------



| |  | economic and other external factors or other disaster or crisis; or
| | - | -------------------------------------------------------------------



| |  | period-to-period fluctuations in our financial results.
| | - | -------------------------------------------------------





New and Potential New Accounting Pronouncements May Impact Our Future Financial Position
and Results of Operations



There may be potential new
accounting pronouncements or regulatory rulings, which may have an impact on our future financial position and results of operations. In particular, there are a number of rule changes and proposed legislative initiatives following the recent
corporate bankruptcies and failures which could result in changes in accounting rules, including the accounting for employee stock options as an expense. On March 31, 2004, the FASB issued an Exposure Draft (ED), Share-Based Payment - An
Amendment of FASB Statements No. 123 and 95. The proposed Statement addresses the accounting for transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that
are based on the fair value of the enterprises equity instruments or that may be settled by the issuance of such equity instruments. The proposed Statement would eliminate the ability to account for share-based compensation transactions using
Accounting Principles Board Opinion No. 25 (or APB 25), Accounting for Stock Issued to Employees, and generally would require instead that such transactions be accounted for using a fair-value based method. As proposed, companies would
be required to recognize an expense for compensation cost related to share-based payment arrangements including stock options and employee stock purchase plans. As proposed, the new rules would be applied on a modified prospective basis as defined
in the ED, and would be effective for public companies for fiscal years beginning after December 15, 2004. We are currently evaluating our option valuation methodologies and assumptions in light of these evolving accounting standards related to
employee stock options. These and other potential changes could materially impact our results of operations.



Item 3. Quantitative and Qualitative Disclosures About Market Risk.



The following discussion about our market risk exposure involves forward-looking statements. We are exposed to market risk related mainly to changes in
interest rates and we believe our exposure to market risk is immaterial. We do not use or hold derivative financial instruments.



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Our investment policy is to manage our marketable securities portfolio to preserve principal and
liquidity while maximizing the return on the investment portfolio. To minimize the exposure due to adverse shifts in interest rates we maintain investments of shorter maturities. Our marketable securities portfolio is primarily invested in corporate
debt securities and commercial papers with an average maturity of under one year and a minimum investment grade rating of A or A-1 or better to minimize credit risk. Although changes in interest rates may affect the fair value of the marketable
securities portfolio and cause unrealized gains or losses, such gains or losses would not be realized unless the investments were sold prior to maturity. Through our money managers, we maintain risk management control systems to monitor interest
rate risk. The risk management control systems use analytical techniques, including sensitivity analysis. We have operated primarily in the United States and all funding activities with our collaborators to date have been made in U.S. dollars.
Accordingly, we do not have any exposure to foreign currency rate fluctuations.



The table below presents the principal amounts and weighted-average interest rates by year of maturity for our investment portfolio (dollars in thousands).



|                              |  |      |         |   |      |   |        |       |  |   |                             |   |  |   |        
|----------------------------- |  | ---- | ------- | - | ---- | - | ------ | ----- |  | - | --------------------------- | - |  | - | -------
|                              |  | 2004 |         |   | 2005 |   |        | Total |  |   | Fair value at June 30, 2004
|Available-for-sale securities |  | $    | 148,380 |   |      | $ | 15,420 |       |  | $ | 163,800                     |   |  | $ | 163,619
|Average interest rate         |  |      | 1.55    | % |      |   | 1.94   | %     |  |   | 1.59                        | % |  |   |        



Item 4. Controls and Procedures.



Evaluation of disclosure controls and procedures. Based on our managements evaluation (with the participation of our chief executive officer and chief financial officer), our chief executive officer and chief financial officer
have concluded that, subject to limitations described below, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended), were effective as of June 30, 2004 to ensure
that information required to be disclosed by us in this Quarterly Report on Form 10-Q was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms.



Changes in internal controls. There were no changes in our internal
controls over financial reporting during the quarter ended June 30, 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



Limitations on the effectiveness of controls. A control system, no
matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute
assurance that all control issues, if any, within a company have been detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are
met and, as set forth above, our chief executive officer and chief financial officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures were sufficiently
effective to provide reasonable assurance that the objectives of our disclosure control system were met.



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PART II. OTHER INFORMATION



Item 4. Submission of Matters To a Vote of Security Holders



We held our Annual Meeting of Stockholders on May 12, 2004. The results of the voting were as follows:



|   |  |                                                                                                                                  |  |                   |  |               
|-- |  | -------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- |  | --------------
|1. |  | To approve the election of one director, Michael M. Wick, M.D., Ph.D., to hold office until 2007 Annual meeting of Stockholders.
|   |  |                                                                                                                                  | 
|   |  | FOR: 32,902,896                                                                                                                  |  | WITHHOLD: 772,787 |  |               
|   | 
|   |  | To approve the election of one director, Richard B. Newman, to hold office until 2007 Annual meeting of Stockholders.           
|   |  |                                                                                                                                  | 
|   |  | FOR: 33,193,649                                                                                                                  |  | WITHHOLD: 482,034 |  |               
|   | 
|2. |  | To ratify the selection of Ernst & Young LLP as independent auditors of Telik for its fiscal year ending December 31, 2004.     
|   |  |                                                                                                                                  | 
|   |  | FOR: 33,658,334                                                                                                                  |  | WITHHOLD: 13,255  |  | ABSTAIN: 4,094
|   |  | BROKER NON-VOTES: -0-                                                                                                            |  |                  



Item 5. Other Information.



In
April 2004, we filed a registration statement on Form S-3 to offer and sell, from time to time, shares of our common stock in one or more offerings up to a total dollar amount of $200 million. Consistent with Section 10A(i)(2) of the Exchange Act,
we are responsible for listing the non-audit services approved by our Audit Committee to be performed by Ernst & Young LLP, our external auditor. During the period covered by this Quarterly Report on Form 10-Q, our Audit Committee approved the
engagement of Ernst & Young to perform services related to the filing of the registration statement and any related offering, which constitute in part non-audit services within the meaning of Section 10A(i) of the Exchange Act. The fees for this
service are not expected to exceed $150,000.



Item 6. Exhibits and Reports on Form 8-K.



| | (a) | Exhibits
| | --- | --------



|     |  |                                                                                                                                                                                                                      
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1  |  | Amended and Restated Certificate of Incorporation. (1)                                                                                                                                                               
|     | 
|3.2  |  | Amended and Restated Bylaws. (1)                                                                                                                                                                                     
|     | 
|4.1  |  | Specimen Stock Certificate. (1)                                                                                                                                                                                      
|     | 
|4.2  |  | Amended and Restated Registration Rights Agreement, dated March 31, 2000, between Telik and holders of Teliks Series B, Series E, Series F, Series G, Series H, Series I, Series J and
Series K preferred stock. (1)
|     | 
|4.3  |  | Right Agreement dated November 2. 2001, by and between Telik and Wells Fargo Bank Minnesota, N.A., replaced by EquiServe Trust Company, N.A., as Rights Agent. (2)                                                   
|     | 
|4.4  |  | Registrants Certificate of Designation of Series A Junior Participating Preferred Stock. (2)                                                                                                                        
|     | 
|31.1 |  | Certification required by Rule 13a-14(a) or Rule 15d-14(a).                                                                                                                                                          
|     | 
|31.2 |  | Certification required by Rule 13a-14(a) or Rule 15d-14(a).                                                                                                                                                          



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|     |  |                                                                                                                                                   
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|32.1 |  | Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).

---

|(1) | Incorporated by reference to exhibits to our Registration Statement on Form S-1 filed on April 4, 2000, as amended (File No. 333-33868).
|--- | ----------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to exhibits to our Current Report on Form 8-K dated November 2, 2001 filed on November 5, 2002.
|--- | -------------------------------------------------------------------------------------------------------------------------



| | (b) | Reports on Form 8-K
| | --- | -------------------



We furnished a report on Form 8-K, dated April 30, 2004, announcing financial results for the quarter ended March 31, 2004.



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SIGNATURES



Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



TELIK, INC./s/ CYNTHIA M. BUTITTACynthia M. ButittaChief Operating Officer and Chief Financial Officer(Duly Authorized Officer and Principal Financial Officer)




Date: August 5, 2004



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EXHIBIT INDEX



|     |  |                                                                                                                                                                                                                      
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1  |  | Amended and Restated Certificate of Incorporation. (1)                                                                                                                                                               
|     | 
|3.2  |  | Amended and Restated Bylaws. (1)                                                                                                                                                                                     
|     | 
|4.1  |  | Specimen Stock Certificate. (1)                                                                                                                                                                                      
|     | 
|4.2  |  | Amended and Restated Registration Rights Agreement, dated March 31, 2000, between Telik and holders of Teliks Series B, Series E, Series F, Series G, Series H, Series I, Series J and
Series K preferred stock. (1)
|     | 
|4.3  |  | Right Agreement dated November 2. 2001, by and between Telik and Wells Fargo Bank Minnesota, N.A., replaced by EquiServe Trust Company, N.A., as Rights Agent. (2)                                                   
|     | 
|4.4  |  | Registrants Certificate of Designation of Series A Junior Participating Preferred Stock. (2)                                                                                                                        
|     | 
|31.1 |  | Certification required by Rule 13a-14(a) or Rule 15d-14(a).                                                                                                                                                          
|     | 
|31.2 |  | Certification required by Rule 13a-14(a) or Rule 15d-14(a).                                                                                                                                                          
|     | 
|32.1 |  | Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).                                                                   

---

|(1) | Incorporated by reference to exhibits to our Registration Statement on Form S-1 filed on April 4, 2000, as amended (File No. 333-33868).
|--- | ----------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to exhibits to our Current Report on Form 8-K dated November 2, 2001 filed on November 5, 2002.
|--- | -------------------------------------------------------------------------------------------------------------------------



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